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Susan.

Susan Karlix

Thank you, Tony. With this morning's first quarter earnings announcement John Deere has started 2013 on a strong note. Income and sales both reached new records for the first quarter of the year and this was our 11th consecutive quarter of record earnings. Our results benefited from healthy farm conditions and the strong sales of agricultural equipment.

Deere's performance also reflected success executing our ambitious marketing and operating plans. Such execution is especially important right now as we are adding new products and global capacity at unprecedented rates. Finally, our full-year earnings forecast has been adjusted upward and now stands at about really $3.3 billion. Also, it was a solid start to what is expected to be another good year.

Now let's take a look at the first quarter in detail beginning on slide three. Net sales and revenues were up 10% to $7.4 billion in the quarter. Net income attributable to Deere & Company was $650 million and earnings per share increased 27% to $1.65.

On slide four, total worldwide equipment operations net sales were $6.8 billion, up 11% quarter-over-quarter including an unfavorable impact from currency translation of about one point. Price realization in the quarter was positive by three points.

Turning to a review of our individual businesses, let's start with Agriculture & Turf on slide 5. Sales were up 16% in the quarter on continuing strength in the large Ag sector, especially tractors and combines. Recall, combine production and shipments were back end loaded in 2012 to facilitate our transition to interim Tier 4. Operating profit was $766 million.

Before we review the industry sales outlook, let's look at some of the fundamentals affecting the Ag business. Slide six outlines U.S. commodity price estimates that underlie our financial forecast. 2012-2013 corn, soybean and wheat prices reflect the production shortfall caused by the weather-driven events that affected the 2011 and 2012 season and continue to support equipment sales.

At this time of the year it is hard to determine what the 2013 2014 crop year will bring. Clearly, the upcoming growing season has a lot of questions around it. Among other things, it should be noted that existing moisture condition show that U.S. drought continues to be of significance. Research, however shows that the moisture situation going into the growing season has virtually no impact on the final outcome. The primary point is that temperature and moisture level experienced during the key growing season are the most important factors in determining yield. As is our custom at this time of the year, our estimates for 2013, 2014 crop year, will see normal weather and trend yields.

Slide seven shows planted acres and yields for the 2012-2013 crop year, compared to the corresponding forecast for 2013-2014 crop year. Again, assuming trend yields in normal weather conditions, corn yields are forecast to increase about 31%, while soybean yields are forecast to be up about 12%.

Slide eight highlights cash receipts. Driven by strong crop prices, 2012 forecast cash receipts are at a record $389 million. In 2013, strong crop prices, higher yields and increase livestock receipts for 2013 cash receipts even higher. As a reminder, in our modeling, current and prior year cash receipts are the primary driver of equipment purchases in the U.S. market. With cash receipts at record levels, this serves well for future farm prospects.

Slide nine illustrates the U.S. farm gross cash income, which is cash receipts plus other farm related income. This slide highlights a relatively small percentage, the government payments and crop insurance play, in gross cash income as represented by green and black areas. Government payments in green are included in total cash receipts numbers on slide eight. For the three years shown, government payments are only about 3% of the total.

Crop insurance receipts are included in other farm related income, the black area and our historic levels in 2011 and 2012 due to drought related events. Total crop insurance payments for 2012 are expected to be in the $15 billion to 16 billion range. As of last week, crop insurance industry payouts totaled roughly $13.5 billion. At the high range, this equates to about 4% of 2012 forecast gross cash income. For your reference, 2011 crop insurance payouts were approximately $10.8 billion.

Our economic outlook for the EU27 is on slide 10. We are seeing offsetting trends in the EU. On one hand, strong crop prices are driving higher farm income. Conversely, in the U.K., the poor harvest of 2012 and wet weather conditions during the 2013 crop selling season are impacting equipment demand, as well the overall economic situation continues to weigh on farmer's sentiment.

Financial conditions in Northern Europe continue to be more favorable than in Southern Europe, but Portugal, Italy, Greece and Spain, all experiencing severe recession.

On slide 11, you will see the economic fundamentals outlined for a few of our other targeted growth markets.

So let's focus on the CIS where our outlook has changed considerably from one quarter ago. Going into effect today and running through July 5, an additional 27.5% import duty has been placed on all imported combines going to Russia, Kazakhstan, and Belarus, bringing the import duty to 32.5%. This will have a considerable negative impact on sales of imported combines in these countries.

Slide 12 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil. It encompasses over 20 different crops and has a high correlation to tractor sales over time. With forecast for a record soybean season due to an increase in acres planted, higher yields and sustained high crop prices, the 2013 value of Ag production in Brazil is expected to increase about 9% over the 2012 level.

Our 2013 and Ag and Turf industry outlooks are summarized on slide 13. Industry sales in the U.S. and Canada are now expected to be flat to up 5% in relation to the healthy levels of 2012. We continue to see strength in demand especially for high horsepower tractors and combines. However our outlook is tempered by drought related effects on the livestock sector. The EU27 industry outlook is now down about 5%. The number one driver in the decline to our outlook is last year's poor harvest and wet weather conditions that could affect the 2013 crop in the U.K. Also weighing on the outlook are overall economic conditions in Europe and the potential for further weakening.

Industry sales of tractors and combines in South America are now expected to be up 10% to 15% in 2013. With strong commodity prices, forecast call for an increase in planted acres resulting in significantly higher crop production. In addition, current government programs in Brazil support higher amounts of equipment sales, not only as the 2012, 2013 subsidy amount allocated to Agriculture higher by about 7.5% but interest rates are also extremely low. Benami financing is at 3% until June 30, then it goes to 3.5% through the end of December.

Our 2013 industry outlook in the CIS countries is now down slightly due to import duties that are expected to reduce demand, as previously discussed. In Asia we now expect industry demand to be slightly higher in 2013 versus 2012. In China, Ag subsidies are expected to be higher and very supportive of equipment sales. In addition, Chinese grain output is expected to increase and farm modernization initiatives are continuing to move ahead.

Although the India tractor market remains soft and industry sales aren’t expected to improve from last year, it is encouraging that interest rates were recently lowered in order to support the economy.

Turning to another product category, we now expect industry retail sales of Turf and Utility equipment in the United States and Canada to be about flat in 2013, reflecting cautious consumer sentiment. Deere expects to outperform the industry with the launch of new turf and utility products especially new utility vehicles. Putting this all together on slide 14, fiscal year 2013 Deere sales of worldwide Ag and Turf equipment are now forecast to be up about 6%, two points higher than our November outlook. 2013 operating margin for the Ag and Turf division is forecast at about 15%.

Let's focus now on Construction and Forestry on slide 15. The division's results were affected by lower shipment volumes, higher production costs including those associated with interim Tier 4 and unfavorable mix of products. Quarter-over-quarter was a very tough compare for C&F. Normally, the first quarter has low production. In the first quarter last year, especially in November and December, the division had extremely high production volumes of high horsepower machines to facilitate the transition to interim Tier 4 engines. As a result, mix in the current quarter also shifted to more purchased products, like excavators and the smaller commercial worksite machines. Increased R&D and SA&G expenses in support of global growth also impacted the quarter's results.

On slide 16, looking at the economic indicators on the bottom part of the slide, Global Insight, has slightly improved its outlook for housing starts and government spending growth. However, our outlook remains cautious as overall economic growth continues at a slow pace awaiting resolution of the fiscal, economic and trade issues that are undermining business confidence and restraining growth. Growth for forestry markets are expected to be about flat in 2013 as weakness in Europe is being offset by improvement in the United States.

Fiscal 2013 net sales in Construction & Forestry are now forecast to be up about 3%. Our previous outlook was up about 8%. The decline reflects lower dealer orders as we see emerging caution regarding inventory levels within our dealers group.

C&F full year operating margin is projected to be about 8%. While Construction & Forestry's full year 2013 outlook is slightly stronger than 2012, the improvement is expected to occur in the second half of the year. In the second quarter, we expect lower manufactured volume compared with last year. Higher production costs associated with interim Tier 4 will have an impact in the quarter, as well as global growth expenses.

Let's move now to our Financial Services operations. Slide 17 shows the financial services provision for credit losses as a percent of the total average owned portfolio at 31 January, 2013 was one basis points reflecting the excellent quality of our portfolios and recoveries from prior year's write-off, our 2013 financial forecast now contemplates the loss provision to be about 16 basis points as a percentage of the average owned portfolio. The 10-year average is about 27 basis points.

Moving to slide 18, worldwide Financial Services net income attributable to Deere & Company was $133 million in the first quarter versus $119 million, last year. For the full year, net income attributable to Deere & Company is now forecast to be about $540 million.

Slide 19 outlines receivables and inventory. For the company as a whole, receivables and inventories ended the quarter up about $1.2 billion, or approximately 30% of trailing 12-month sales, the same relative to one year ago. The increase year-over-year is predominantly Ag, mainly reflective of higher sales volume. The C&F increase is mostly related to Canadian consigned in Nortrak's inventories. This occurred as dealer rebuilt their inventories prior to the current caution in the market.

We expect to end 2013 with receivables and inventory up about $500 million. The increase from our prior forecast relates to a stronger large Ag market in the U.S. and Canada, strong markets in South America and better definition to our final Tier 4 engine transition plan. Our guidance for cost of sales as a percent of net sales shown on slide 20, remains at approximately 74% in 2013. Factors affecting cost of sales include price realization, production and manufacturing costs, raw material costs, engine emission product costs, absorption and effects of foreign exchange.

For modeling purposes, keep in mind, price realization, we are forecasting about three points in 2013. Interim Tier 4 product costs that we've talked about the last two years, lower production than in 2012, reflecting a much lower inventory build than last year, which affects absorption and the impact on cost of sale from new employees. In keeping with our growth plans, Deere hired an additional 5,000 people in 2012 with over 3,000 of them joining us in the last three quarters of the year. These additions are critical to support our growth both domestically and internationally and will impact cost of sales, R&D and SA&G in 2013.

I want to quickly run through January retail sales. Unfortunately, the AEM numbers were released too late to incorporate into our slide back. For utility tractors, industry sales were up 12%. Deere sales were flat in the month. Industry inventory for the utility tractors for the month of December were 48% of the previous 12 month sales. Deere inventories were lower. Industry sales of row crop tractors were up 27% in the month. Deere sales were up double digits but less than the industry. Industry row crop inventories for December were 28% of the previous 12 month sales. Deere inventories were lower than the industry.

Moving to four-wheel drive tractors, industry sales were up 89% while Deere sales were up triple digits. December industry inventories were 21% of previous 12 month sales. Deere inventories were slightly higher. For combines, industry sales in the month were up 17%. Deere sales were up more than the industry. Industry inventories for December were 11% of the previous 12 month sales. Deere inventories were slightly lower. Deere dealer inventories at January 31, 2013 for row crop tractors were 19% of previous 12 month sales compared to 12% in 2012. Comparable numbers for combines are 11% at January 31, 2013 versus 5% in 2012. The remaining industry sales for Ag and Turf, the EU27 and C&F can still be found in the appendix of our slide deck.

Now back to the slides. Looking at our R&D expense on slide 21, R&D was up 14% in the first quarter compared with the same period last year consistent with our guidance that the increase in R&D spending for 2013 would occur in the first half of the year. Our 2013 forecast continues to call for R&D expense to be up about 3% for the full year.

Moving now to slide 22. SA&G expense for the equipment operations was up about 10% in the first quarter. Very much like R&D, the quarter-over-quarter increases for SA&G are heavily weighted to the first half of the year. In fact about 70% of the SA&G increase will occur in the first two quarters. SA&G expense is forecast to be up about 7% in 2013, no change from our previous guidance.

The equipment operations tax rate was about 30% in the first quarter with the rate affected by discrete items. While it is not our practice to provide specific of discrete items we would note the extension of the R&D tax credit for 2013 and it's being retroactive to 2012. For full year 2013, the effective tax rate is forecast to be in the range of 34% to 36%, representing no change from our previous forecast.

On slide 24, you see our equipment operations history of strong cash flow. We continue to forecast cash flow from equipment operations to be about $3.4 billion in 2013.

On slide 25, we outline our 2013 outlook for the second quarter and full year. Our net sales forecast for the second quarter is up about 4% compared with 2012. This includes about two points of price realization with unfavorable currency translation of about one point.

A couple of other items to keep in mind as you model the second quarter. As we stated previously, R&D and SA&G expense are front-end loaded costs affecting our year-over-year second quarter results and in last year's second quarter results were favorably impacted by a reduction in pension and OPEC expense of approximately $65 million. The full year forecast now calls for net sales to be up about 6% compared with 2012. Price realization is expected to be positive by about three points. We have increased our full year 2013 net income forecast to about $3.3 billion.

In closing, John Deere has entered 2013 on a strong pace. Our key markets remain in good shape for the most part and we are looking for another solid year. True, our near-term outlook is tempered by uncertainties over fiscal, economic and trade issues. This is hurting business confidence and restraining growth, but we continue to invest in the future as the longer-term picture continues to be extremely bright.

Our plans for helping meet the world's growing need for food, shelter and infrastructure are well on track and moving ahead. All-in-all, we remain highly confident about the company's future prospects and our ability to deliver value to customers and investors in the years to come.

Tony?

Tony Huegel

Thank you, Susan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. But as a reminder, in consideration of others, please limit yourself to one question and one related follow-up. If you have additional questions we ask that you rejoin the queue. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Andy Kaplowitz, and please state your company name.

Andy Kaplowitz - Barclays

Good morning, guys. It's Barclays. Nice quarter. If we could talk about construction first, can you talk a little bit more about your comments around emerging caution from dealers? To me it sounds a big counterintuitive, you know, having going the right way. Is the rental market slowing down for you and you didn't mention energy and material handling you as a strength which you have in the past?

Tony Huegel

Yes. We would actually. In terms of strength, where we are strength, we would continue to say the key areas, rental continues to be stronger energy related as well as material handling. That really hasn't changed. I think, where the ready outlook has changes, we are seeing some caution around some of the uncertainties around fiscal policies and particularly impacting our Construction & Forestry business, and dealers in particular, I think also are cautious. And as a result, they are beginning to pull down their inventory somewhat.

Andy Kaplowitz - Barclays

Okay. I bet other people ask you about that. Tony, if I could ask you about your guidance, you maintained your guidance of 74% cost of sales. You did 74% in the quarter, we were modeling something worse. It seemed like you executed quite well in the context of although that's your employees that came in the beginning of the year or at the end of last year. So, why wouldn't margins go up toward the end of the year, that cost of sales number go down, you production of combine should be going up at least modestly and you would better absorb those employees, especially considering price cost should be relatively good this year.

Tony Huegel

Right. Actually you touched on one of the reasons with combines shipments. Keep in mind that last year we actually had the opposite phenomena and in the sense that we were producing and shipping a higher than normal percentage of combines in the back half of the year. And in 2013, we'll be moving to what would be a more typical shipping pattern on those combines, so we are seeing a lot more being shipped in this first half. Especially in the first quarter, we saw more combines shipped versus last year.

In fact last year was like maybe about 10% the combine that were of the annual shipments of combines went out in the first quarter, and Europe closer to 15% to 20% in the first quarter this year, so it's a big shift.

Andy Kaplowitz - Barclays

Okay. Thanks, Tony.

Operator

Thank you. Our next question comes from Jamie Cook, and please state your company name.

Jamie Cook - Credit Suisse

Hi, Good morning. Credit Suisse, and sorry just to follow-up to Andy's question on the C&F side, I guess two questions. One, I mean, Tony, when you look at your forecast on housing, it's up a little, non-res is down a little, so your economic forecast really hasn't changed that much, so I guess my question is, is this more Deere specific and that that you had too much inventory in channel and you are making some adjustments that other people made before and just what's the level of dealer inventory out there I guess needs to get cut.

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My second question is, I am pretty sure you said margins are still 8% in C&F on a lower sales forecast, and I just wanted you to confirm that, and then how were you able to achieve the same margins on a lower sales increase? Thanks.

Marie Ziegler

Sorry, Tony, our (inaudible). So Jamie, we are really tweaking our inventories on that construction side. If you look at the ending guidance, its down hundred and some million dollars from our previous outlook. So it is really tweaking but again, in the field, we are seeing a little slower rate in terms of inventory growth and that is just what you are seeing in terms of inventory ordering. So you are seeing that reflected in a little bit of caution in our outlook especially for the second quarter.

Jamie Cook - Credit Suisse

But I guess, Marie, do you feel like you guys were a little late on the inventory reduction relative to some other guys? Or you were just more cautious? Is it marker or is it Deere? I guess I am still not.

Marie Ziegler

I think if you are comparing us to another company, you know we are talking $100 million, $200 million, not dramatic changes relative to others. So I think you are talking more tweaking but nonetheless that shows up in our sales guidance.

Jamie Cook - Credit Suisse

Okay, fine, and then just on the margin question, Marie. Thank you.

Rajesh Kalathur

Hey, Jamie, this is Raj. Just on the C&F inventories, we are essentially up, C&F inventories versus receivable to about $200 million for Q1 primarily because we have a stronger market in Canada for construction and we have consigned inventory in Canada. Okay, that’s what went up. Now we are taking it down. The reduction in the C&F forecast, we like taking it down and that is reflected in, as Marie said, inventory versus receivables going down almost nothing by the end of the year.

Tony Huegel

Remind us about the margin question.

Jamie Cook - Credit Suisse

Yes, I think you said margins are the same and I think your sales forecast is a little lower.

Marie Ziegler

Debt to EPS C&F margin is the same.

Jamie Cook - Credit Suisse

I think that your Tier 4 class assumption's are lower. Is there anything else driving that or not? Because it seems to me, the mix isn’t going to help your sales forecast. All right, maybe I am splitting hairs.

Marie Ziegler

There is no big story there other than I think a good attention to the level of expenses.

Operator

Our next question comes from Stephen Volkmann and please state your company name.

Stephen Volkmann - Jefferies & Company

Hi, good morning, it's Jefferies. I was hoping, we could just have a bit of an update on where the order books stand and for any programs you might want to highlight and then curious about what you are seeing in the used market as well?

Tony Huegel

I assume you are referring on the order books in U.S. and Canada on Ag.

Stephen Volkmann - Jefferies & Company

Yes, please.

Tony Huegel

Okay, yes. Basically, they continue to be very, very strong. I am looking for the exact data here.

Marie Ziegler

And while Tony is looking and that’s really reflected in the improved guidance for North American Ag where you see us taking it flat to up 5% for the industry where we have been flat before and that is driven almost exclusively by large Ag. Tony?

Tony Huegel

Right, so specifically on early order programs and these are for the order programs that were active during the quarter. So excluding cotton and combines and sprayers ended during our fourth quarter. So, outside of that, we are still low double-digits year-over-year on the early order program. So that things like self-propelled windrowers, forage harvesters, as well as planting equipment. Our combine early order program ended in mid-January and was for the U.S. and then February 1 in Canada but very, very strong and we have virtually all of our production covered with the early order program.

On tractors again, our order window is open about seven months and track tractors in particular, are very strong. Both 8 and 9 track tractors are affectively sold out during that order window. In both cases, keep in mind that’s with additional capacity for U.S. production. On the 8R wheeled tractors, the effective availability is late June. Again on additional capacity, over 2012 and on the 9R wheels, there is availability in April of this year which is similar to where we were last year. So, across the board very comfortable to where we were last year, but on higher capacity for the U.S. and Canada.

Rajesh Kalathur

On the used equipment, now what I can comment, Steven is, the combines is one that everybody picks up typically, value of the price levels are holding very low, inventories and turns are in decent shape as well. Now, when it comes to tractors [crops] were in very good shape and all those key parameters four-wheel drives, given the retail sales we have had, we are very comfortable with the inventory levels and the turns we have on four-wheel drives. Pricing is holding very well as well.

Stephen Volkmann - Jefferies & Company

That's great. And just quickly, the increased capacity that you spoke of, Tony, can I think of that as 15%-ish?

Tony Huegel

It's in the 15% to 20% range on tractors.

Stephen Volkmann - Jefferies & Company

Super. Thank you.

Operator

Thank you. Our next question comes from Ann Duignan. Please state your company name.

Ann Duignan - JPMorgan

Hi. Good morning. JPMorgan. Can we talk about Ag and turf for a little bit? I was surprised you kind of lost over the unfavorable impact on margins this quarter. Can we get a little bit more detail, particularly on the warranty costs? Is that just accruals? Is it actual costs? Where are they coming from? And then production costs and R&D also.

Marie Ziegler

Let me start with warranty. Ann, as you know Deere has extremely high product quality. And in fact over the last decade, we've taken our warranty rate actually down by about a third, so we are doing very good in that. You are well aware as I am sure everyone is, that we have had because of IT4, a record number of product introductions in a compressed time. And it's good as our product or occasionally we have to make a few corrections and so this really just relates to the fact we've had this huge number of product introductions. And when you launch something new, you occasionally have to make a few fixes, so no big story there.

Ann Duignan - JPMorgan

Okay. So, are we done with those warranty costs now, or they are headwind for the remainder of the year?

Marie Ziegler

We would expect that you might see a little bit of an increase in the run rate as you move forward again just reflecting on the launch of product. In any other quarter, it wouldn't have even shown as factor to explain the quarter's results. It's just that we had relatively low sales volumes in the first quarter, so it's a little more apparent.

Ann Duignan - JPMorgan

That's fair point. Just a little bit more philosophically kind of around the warranty costs, or Tier 4 interim. You are the only company that's really calls out the transition to Tier 4 engines quarter-after-quarter is being a headwind. Is there any case to be made that that's because you are EGR first then going to SCR, whereas most of the rest of the industry both, construction and Agriculture went primarily to SCR or how should we as investors think about your struggle with this transition relevant to as peers?

Marie Ziegler

Excuse me, Not a struggler, actually a very, very good execution. We just want to help you understand that there are costs associated with this product cost in addition to the R&D and the capital expense associated with it and that's helpful in understanding our margins. We've done a very good job on cost recovery and we have added a significant amount of value to our customers. Because as we've discussed in the past, the product introductions are around IT4, so in addition to getting the emissions upgrade, we are getting a tremendous amount of features and values.

Rajesh Kalathur

So, let me reiterate something here, Ann. In terms of investments for our emissions, no. We are making dollars and I think we are talking about those. Our competitors have costs as well, okay? So it's not cost that only Deer is seeing. Others are seeing it as well. And, like Marie said, our implementation is done very well and we are looking forward to keeping that momentum FT4 transitions as well coming up '14 and '13.

Tony Huegel

I would also reiterate, compared to some of our competitors if you look at our overall margin, I think we are doing fairly well.

Ann Duignan - JPMorgan

I will leave it there and get back in line. Thanks guys.

Operator

Our next question comes from Eric Crawford and please state your company name.

Eric Crawford - UBS

Hi, good morning, UBS. Wanted to touch on the South American outlook. Clearly seeing some strength in Brazil but I am curious how the competitive dynamics are playing out. Are you seeing room to tick up pricing more than you originally planned and you expect your share in combines, perhaps, to recover after it took a dip?

Tony Huegel

Yes, and certainly as we look at our pricing, again in Brazil. we continue to have positive price realization year-over-year, again in the first quarter. We had positive price realization. I think for us, as you are aware, we have introduced a number of new products in to that market and they have been very, very successful. We have talked for a number of years about the strength of our distribution and I think as you see the market shares shift, that just further demonstrates what we have been saying regarding the strength of that distribution.

So again we are very positive about that regarding combines. Certainly we would hope to see the recovery and keep in mind, it is a pretty small drop in the year on combine market share but we would certainly expect to continue to recover from that and perhaps even extend our share further.

Eric Crawford - UBS

That’s fair. If I could just as a follow-up on CIS. You didn’t say credit being a factor. So is it safe to assume that it is not having an impact or is it just that there has been no change there and in light of the higher import duties has you longer-term view on that market changed at all?

Tony Huegel

Yes, certainly with credit I wouldn’t imply that by lack of discussion that it isn’t an issue because certainly there is some tightening of credit and in CIS countries. We talked about it last quarter. Really it is just the more significant change would be around the import duties, specifically on combines that were added. Keep in mind that really begins in mid-February and runs through June currently.

Marie Ziegler

July.

Tony Huegel

Oh, its actually July, I am sorry. And then there will be a determination of whether that gets extended or not. So it is probably premature to talk about what kind of long-term impact that may have.

Operator

Our next question comes from Eli Lustgarten and please state your company name.

Eli Lustgarten - Longbow Securities

Longbow Securities. Good morning, everyone. Can we just talk a little bit more on construction equipment and a little more color, I think indicated second quarter productions are going to probably trail last year numbers and Brazil has some tax on imports of construction equipment. Is part of the reduction in forecast due to some of the tax there and Brazil also? Or can you go back second quarter production versus last year? And do you think it is going to change?

Marie Ziegler

I am sorry, Eli, I cut you off.

Eli Lustgarten - Longbow Securities

Is most of the drop in production for the 3% gain in CIS coming in the second half of the year?

Marie Ziegler

So the drop in the second quarter is really exclusively related to North American construction and then there is also some forestry activity. In Brazil, indeed we are actually building our presence. So although there are tariffs, as you know we are entering that market. We have got a dealer network that we are supporting with equipment sales, imported equipment sales prior to the launch of production in our factories which will really be '14 and 2015 event. So it has nothing to do with Brazil and it’s a tweaking in North America as we talked about earlier.

Eli Lustgarten - Longbow Securities

Okay, and so as a follow-up, you mentioned nothing about material cost this year. There is actually a tailwind versus last year. We are approaching final Tier 4 next year in '14 and '15. Can you give us some insight on how it is going to affect Deere, and some of your larger equipment and in Ag, you will probably after you introduce final Tier 4 next year? So how that incremental cost would be as we get closer to that date?

Tony Huegel

Sure, and I want to make sure that I am separating the two because we talk about in the past about material cost and then we have talked about interim Tier 4 material cost. As we mentioned, in the first quarter material costs excluding IT4, it is not a material impact, either positively or negative in terms of driving any change in that cost of sales percentage.

On interim Tier 4, certainly that is an impact, the emission cost, if we look at unfavorable factors impacting our cost of sales ratios, interim Tier 4 product cost would be the largest impact in this year. As you mentioned, we'll move into final Tier 4 beginning in 2014, and so you will start to see in addition to, you have your interims forecast to pretty much be completed, but you will start seeing final Tier 4 and that should be fairly similar to what we saw in terms of the ramp-up, not necessarily the total cost to what we saw with interim Tier 4 in that large Ag 175 horsepower equipment is the effective date of that that regulations is January 1, so you will start seeing large ago Ag go and then below 175 horsepower in 2015.

Eli Lustgarten - Longbow Securities

So we see the cost beginning in the second half of this year, this fiscal year, beginning ramp up as we get closer to it?

Marie Ziegler

In first quarter you might see a little bit of the impact more as you get started with some demonstration models and things like that farm shows, but no it's really a fiscal 2014. You're also aware we talked about the inventories and receivables being a little higher on the Ag side than what original guidance have been. We will continue to refine our transition plan as we move through the year, so you can some activity there.

In terms of cost up, Eli, the bigger cost up was really to go from Tier 3 the IT4. Going to final Tier 4 well, is still cost up, is not quite as significant. I do not have precise estimates of the number, but as you said on a 10-point scale, if you are going from Tier 3 to IT4 was a 10 then maybe you are looking at 5-point, 6-point 7-point to go from IT4 to final Tier 4, but we are still, as you might imagine, working on that.

Eli Lustgarten - Longbow Securities

Thank you very much.

Marie Ziegler

Thank you.

Operator

Thank you. Your next question comes from Rob Wertheimer, and please state your company name.

Rob Wertheimer - Vertical Research Partners

Hi. It's Vertical Research Partners. Good morning, everybody. My first question is, did I understand on the Russia turf issue that's only on the combine side and did you build into your forecast that on tractors as well as that's something you expect?

Tony Huegel

Yes. At this point that import duty is only on combine and we are not aware of any change at point with tractors, so the outlook really is impacting combine alone. That impact as Susan pointed out, it's not just Russia, but that affects Russia and Kazakhstan as well as.

Rob Wertheimer - Vertical Research Partners

Okay. Thanks. Then second just sort of a big picture question. Obviously the environment was strong in Brazil, I am curious about what kind of customers are buying the biggest sort of largest corporate firms there tend to buy stuff and use it runs all the way down. I don't know whether it's accelerating I don't know whether it's the development of used market in Brazil as they maybe accelerate, or whether it's mid-tier farmers who are buying more or smaller. I am just wondering if you can give just sort of a bit of color around about Brazil is evolving.

Tony Huegel

Sure. Certainly there continues be and it kind of depends on what industry you are referring to in terms of a typical usage. For example sugar industry tends to use both, tractors and harvesters very heavily on an annual basis. And to your point, with their holding patterns they tend to be pretty much ready for scrap by the time they are ready to the trade-in.

Grain industry is a little bit different and there is probably to best characterize maybe a bit of a developing used equipment market. Typically they are trading in every five years or so, but a typical grain farmer is putting fewer hours on than what you would see in the sugar industry.

So, our dealers do take trade there. In some cases, similar to the U.S. still have an in-house used equipment department to process those through. Some of them actually outsource it and have others take care of selling that used equipment. But again I would characterize it more as a developing issue or market versus what you would have in the U.S.

Rob Wertheimer - Vertical Research Partners

Are you seeing strength amongst the very biggest, the big corporate ones and then large line holders and small as well anything that you can call about a lot of your customers? Thanks. I will stop.

Rajesh Kalathur

This is Raj. Let me broadly say that, some time back there was this Mais Alimentos program in Brazil that provided additional subsidies for smaller farmers and we have seen that that’s peaked off and since then the national economics has determined essentially that the larger farmers are growing. Okay, and if you look at our own past experiences, these are very large farmers and in 2011, 2012 approximately 60 of these farmers who would contribute almost $0.5 billion worth of our revenues in that market. We have said that in the past.

If you look at the first quarter, we have a slightly higher proportion of large Ag sales in Brazil than in the first quarter of last year. So it is increasing especially for us towards large Ag and our proportion of large customers is increasing.

Rob Wertheimer - Vertical Research Partners

That’s great. Thank you.

Operator

Our next question comes from Andy Casey and please state your company name.

Andrew Casey - Wells Fargo Securities

Wells Fargo Securities. Good morning, everyone. First, just a clarification on the revenue forecast change. Does that include any modified currency assumption?

Tony Huegel

No, it does not.

Marie Ziegler

No.

Andrew Casey - Wells Fargo Securities

Okay, so all volume basically.

Tony Huegel

Right.

Andrew Casey - Wells Fargo Securities

And then second, within Ag and Turf, are you redirecting any combine shipments to other regions due to this increased import duty issue? And then is that removing some upside potential to margin driven by the richer mix implied in the U.S. and Canada outlook changes?

Marie Ziegler

No. There may have been some tweaking in terms of the timing of some shipments but I don’t think given the relative size of the market you are not looking at a big, huge change on the combines.

Andrew Casey - Wells Fargo Securities

Okay, thanks. I will follow-up later on.

Operator

Our next question comes from Joel Tiss and please state your company name.

Joel Tiss - BMO Capital Markets

I am back at Montreal. How are you doing guys.

Tony Huegel

Great. How are you?

Joel Tiss - BMO Capital Markets

All right. So just two things. One is, can you tell us if the profitability of the European Ag business was up or down in the quarter?

Tony Huegel

Unfortunately, we can't speak to profit margins in specific regions.

Joel Tiss - BMO Capital Markets

Whatever. All right, and why the big range on the tax rate? The 200 basis point?

Marie Ziegler

That’s typical.

Tony Huegel

We typically have, in fact, that’s been consistent with our range that we started the year with and throughout the year last year as well.

Joel Tiss - BMO Capital Markets

All right, I guess, as long as Raj is here, can you talk a little bit about the long term attraction of the forestry equipment business? It seems to be just bouncing around for the last 10 years and not really going anywhere.

Rajesh Kalathur

So the forestry business is a very important portion of our business. If you know, our long term strategy, and our 2018 aspirations, we have articulated that we have the growth businesses which are Ag and construction and the complimentary businesses Turf or Ag and forestry or constructions. So we think of that as an important contributor going forward in terms of being complimentary to the construction equipment business. In terms of longer term growth, we are not expecting as much from forestry as from construction. Tailwinds in construction is very critical for us. Tailwinds in forestry, we think are very modest. So we have been looking to get good SVA and not great top line from forestry going forward.

Operator

Our next question comes from Jerry Revich and please state your company name.

Jerry Revich - Goldman Sachs

Good morning. It is Goldman Sachs. Tony, in Eastern Europe with your of facilities or manufacturer footprint there, it sounds like you are better positioned than most for a potential change in the tariff regime. Can you just talk about what kind of local content requirements would be needed for combines to be considered local when over what time period would you be able to configure your facilities there to do some assembly work in the region?

Tony Huegel

Yes. Certainly. Unfortunately now with any specific. We are currently working with the Russian government specifically in terms of what those definitions are and trying to ensure that we can move that direction if feasible and qualifies local production, but that's something that we are working through at the moment.

Jerry Revich - Goldman Sachs

And, Tony, can you comment on around what timeframe you would be able to execute that if you did reach an agreement?

Tony Huegel

It depends on how quickly you can reach an agreement and what that requirement would be that be, so it would be very premature to speculate on that.

Jerry Revich - Goldman Sachs

Okay. And from a pricing standpoint maybe the answer is mix or rounding, but I am wondering if you can comment. Your pricing this quarter was 100 basis points lower than your guidance and you are looking for two points of pricing into fiscal second quarter accelerating back to 3% in the back half of the year and I am wondering if you could just step us through what's driving the versus your expectations in the first quarter and the mix improvement in the back half versus 2Q.

Tony Huegel

I believe, we talked about three points of price realization for the full year.

Rajesh Kalathur

It was 4 for the quarter.

Marie Ziegler

Four for the quarter, there is really not a story there. As you can see that we are unprepared to answer it nothing.

Rajesh Kalathur

Part of that Jerry is lot of rounding. You need to be careful about how we do this, right? so, more so story you will find is actually in rounding.

Jerry Revich - Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question comes from Ashish Gupta. Please state your company name.

Ashish Gupta - CLSA

Hi. Good morning. CLSA. I am maybe at the risk of asking you to rehash some things you already described, but it seems like guidance is implying something like 11% incremental margins for the equipment business for the second through fourth quarter's year-over-year and I realize you mentioned the combine production is more evenly balanced this year versus last year, but I was just wondering if there is anything else in there that would have sort of point to the deceleration incremental profitability.

Rajesh Kalathur

So, now Ashish, we need to re-provide guidance and the top line as you know 1% increments, so there is a range that you need to be careful about in terms of rounding 0.2 to 1.8, okay? And again, on the other hand, we provide guidance on net income $100 million increments, so you got to be thinking about the range there as well could be anywhere between $20 million $180 million. And if you look at our operating margins for Ag and C&F, we have said it's 15%, 8%, those have not changed. And now, we are also looking at in terms of effective tax rate 34 to 36. Now, Q1 what 30, because of a discrete item. Overall, we are saying it's going to be 34 to 36, and then given the uncertain economic environment around the world, you will expect some caution from us in crops at least so especially in the second half outlook. So, factoring these, I think you should be able to add up the numbers that we provided.

Ashish Gupta - CLSA

That's helpful, Raj. Thanks very much.

Operator

Thank you. Our next question comes from Adam Fleck, and please state your company name.

Adam Fleck - Morningstar

Good morning. I wanted to turn back maybe to the Western European market. We know that market continues to weaken. Are you seeing any competitive issues or pricing pressure you'd call out?

Marie Ziegler

No. The biggest change that we are seeing is really coming out of the U.K., which relates to the weather that we've talk already about, but it's a large one of the key markets in that part of the world and it is very, very weak. We're actually seeing some stabilization in the South, which is gratifying although stabilizing at very low levels. We actually had some strength in markets like France and even some growth in Germany. So, it's really is really the U.K. the unique phenomena related to the weather and resulting crop yields of last year and then concern emerging over what happened this winter.

Adam Fleck - Morningstar

But you are not seeing any increased attempts at marketing efforts or price cuts or anything like that in that particular weak market?

Marie Ziegler

Nothing out of the ordinary.

Adam Fleck - Morningstar

Okay, great. That’s helpful, thanks. Then just one more from me quickly. Your share repurchase activity dropped prettily sharp in the quarter. Is that just because of a more cautious economic outlook that you described or is there anything else there?

Marie Ziegler

Absolutely. I think you may recall that we ended the year with about $6 billion of cash and we said we had pulled forward some funding because we were concerned about the outlook for the risk on fiscal cliff, et cetera and consistent with that, we moderated our share repurchases and I do want to emphasize that share repurchase is a residual use of cash. This tends to be a high use of cash time for us in the first half of the year as well. So no story.

Rajesh Kalathur

This is Raj. Let me reiterate that our cash use priorities are the same. They haven’t changed, okay.

Tony Huegel

Okay, thank you. Operator, I think we have time for one more call.

Operator

Thank you. Our final question comes across Ross Gilardi and please state your company name.

Ross Gilardi - Bank of America Merrill Lynch

Yes, Bank of America. Just on that cash flow prioritization. I know you clearly had a big quarter in Ag. What signals are you looking for to raise the dividend more substantially?

Marie Ziegler

Well, we do not ever comment on dividend policy actions. You know that we convey that over a long time. We desire to be known as a company that consistently and moderately increased dividends and that we have a targeted payout on average over a long period of time of 25% to 35%. If you look at the monies that we have returned to shareholders really since we began our share repurchase program in 2004, you are looking at about 60%. Some of that has been in the form of dividends. Some of it has been in the form of share repurchase.

Ross Gilardi - Bank of America Merrill Lynch

Okay, thanks, and then just on a Section 179, do you think that had a big impact on demand in December? Is that borrowing from your first half 2013 outlook at all? Just could you clarify, is this is a one-year extension or is it been extended indefinitely?

Marie Ziegler

It extends through 2013. Actually, at the margin, we would view it very much so as additive because it is most significant in helping facilitate moving the used goods and that’s obviously important in a mature market. So that was a favorable development for us.

Tony Huegel

I am sorry. Keep in mind, on new equipment, in terms of, for our farmer customer, by the time they realize they want to extend some tax shelter or take advantage of that quite often for us, our order book, especially on large Ag are extended beyond January 1 or December 31 and so they wouldn’t be able to order and receive that equipment ahead of that December 31 cutoff to take a lot of advantage of new equipment.

Rajesh Kalathur

The recent Section 179 announcements came in the first week of January. So the previous November, December, this was after that November, December when the announcement came in. So, as Marie said, we are expecting an impact on the used equipment movement because it is this year and not in 2012.

Ross Gilardi - Bank of America Merrill Lynch

Just, could I ask one last question on China subsidies?

Tony Huegel

We will have to cover that in follow-up. Okay, thank you very much. In summary, just wanted to reiterate, obviously while our near-term outlook is tempered by uncertainties over fiscal, economic and trade issues, we have entered 2013 on a very strong pace and looking forward to another solid year. With that, we thank you for your participation in the call and as always, we will be available the rest of the day to answer any additional questions you may have. Operator?

Operator

Thank you and this does conclude today's conference. We do thank you for your participation. You may now disconnect your lines.

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